When Overconfident Traders Meet Feedback Traders - Updated from 2016

Fabrice Rousseau, Herve Boco and Laurent Germain
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Herve Boco: TBS Business School
Laurent Germain: TBS Business School

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: We develop a model in which informed overconfident market participants and informed rational speculators trade against trend-chasers. In line with empirical findings we find a positive relationship between the volatility of prices and the size of the price reversal. We obtain that this result depends on different parameters of the model such as the number of positive feedback traders, how overconfident traders perceive the information of others, as well as the number of informed traders present in the model. In addition we obtain that the presence of positive feedback traders leads to a higher degree of trading activity by both types of informed traders. We also get that overconfidence may lead to lower price volatility and more efficient prices. We obtain that overconfident traders may be better off than their rational counterparts.

Keywords: Overconfidence; Positive Feedback Trading; Excess Volatility; Market Efficiency; Computer Based Trading; Algorithmic Trading. (search for similar items in EconPapers)
JEL-codes: D43 D82 G14 G24 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020
New Economics Papers: this item is included in nep-cbe, nep-cse and nep-mst
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